WHAT IS ACCOUNTING ?

Process of identifying, measuring

and communicating information for
taking informed decisions by users
of the information.
 OWNERS

LENDERS GOVERNMENT

SUPPLIERS BUSINESS COMMUNITY

CUSTOMERS EMPLOYEES

MANAGERS
Material COMPARABLE

ATTRIBUTES OF USEFUL RELIABLE

RELEVANT FINANCAIL IFORMATION

UNDERSTANDABLE
COST EFFECTIVENESS OF
THIS INFORMATION
TWO TYPES OF ACCOUNTING
1. Management Accounting
Which meets needs of managers
Of managers for managers and by managers

2. Financial Accounting
Which meets needs of all other users

COST ACCOUNTING IS A PART OF MANAGEMENT ACCOUNTING

AND MAINLY PERTAINS TO COST DATA
Management Accounting differ on
following areas !
1. Nature of reports
* Specific
* Non-financial
2. Level of details
3. Regulations
4. Accounting periods
5. Reporting Intervals
Developing long term Performance evaluation
strategies & control

USEFULNESS OF MANAGEMENT
ACCOUNTING IN DECISION-MAKING

Planning costs and

Allocating resources
pricing
Planning

Operating Control

Evaluating
IMPORTANCE OF NON-FINANCIAL
INFORMATION

Things which count some times

should not be counted !
 ROLE OF THE MANAGEMENT ACCOUNTANT
IN THE MANAGEMENT TEAM

vide revenue estimates and cost estimates and their analysi

differs with each type of the industry. Each industry has its
techniques for efficient production with low cost

IMA
Statement of Management Accountants
Framework for Management Accounting
FRAMEWORK FOR MANAGEMENT ACCOUNTI

Specificities of each industry may change but

underlying goals would remain same
1. Interpret and communicate all inside and outside inform
2. Establish planning and control systems
3. Develop information systems
4. Ensure that information communicated has all attribut
of good accounting information
BASIC MANAGEMENT ACCOUNTING REPORT

Budgets

Cost Analysis

Manufacturing cost reports

 DYNAMISM IS THE INGREDIENT
1. The increasing sophistication of customers
2. Globalization of the businesses
3. Rapid changes in technology
4. Advancement in IT
5. Increasing volatility of financial markets
6. Pressure from shareholders for maximum
returns
 CUSTOMER DRIVEN
MANAGEMENT ACCOUNTING
MAIN OBJECTIVE IS SAME AS
BUSINESS OBJECTIVE

Maximization of profits
Survival
Long term stability
Expansion and growth
 QUIZ
Do you think that accounting reports
should be understandable to those
who have not studied the
accounting?
 QUIZ
Suppose an item of information is capable
of being provided. It is relevant to a
particular decision. It is also reliable,
comparable and can be understood by
the decision maker concerned and is
material.
Can you think of a reason why, in
practice, you might choose not to
obtain/produce the information?
 ASSIGNMENT
Can you think of any reasons why making
the maximum profit possible this year
may not be in the best interest of the
business and those who are involved
with it?
Please think of several reasons and
enumerate them.
WHAT IS COST ?
Amount of resources, usually
measured in monetary terms,
sacrificed to achieve a particular
objective
THREE SITUATIONS !
TYPES OF COSTS ( situation 1 )
Frame of Reference Bhai!
Past (Sunk) and Future outlay costs

Relevant and Irrelevant costs

* Uncommon with the options

Opportunity cost is notional but relevant

 RELEVANT COSTS IRRELEVANT COSTS

Opportunity costs Past costs

Uncommon Future costs

Common Future costs
 COSTING OF PRODUCTION
(Situation 2)

1. Fixed costs

2. Variable costs
FIXED COSTS in $

no of units fix ed c os ts
0 3000
100 3000
200 3000
300 3000
400 3000
500 3000
 fixed costs

8000
7000
6000
5000
cost in $

4000
3000
2000
1000
0
1 2 3 4 5 6
num be r of units(100s)
VARIABLE COSTS in $

no of units variable costs

0 0
100 500
200 1000
300 1500
400 2000
500 2500
 VARIABLE COSTS

3000

2500

2000
cost ($)

1500

1000

500

0
1 2 3 4 5
number of units in 100s
Costing of each unit ( situation 3)

Cost behavior Directness of Cost

1. Fixed cost 1. Indirect Cost

2. Variable cost 2. Direct Cost

Why need for costing ?

1. For Pricing purpose

2. For Income measurement

FIXED COSTS VARIABLE COSTS

FULL COST OF
PRODUCTION
DIRECT COSTS INDIRECT COSTS

FULL COST OF THE UNIT

SHORT TERM ISSUES

LONG TERM CONSIDERATIONS